Principle of Bimetallism
Bimetallism is a monetary system based on two precious metals, usually gold and silver. Currencies could be freely exchanged in both forms at fixed, intangible ratios, and therefore had to be doubly guaranteed.
These two metals, which simultaneously serve as standards, are used for exchanges and transactions. Bimetallism is opposed to monometallism, which guarantees the legality of only one metal.
The limits of bimetallism
Gresham's Law
Selon la « loi de Gresham », lorsque deux monnaies légales sont en circulation dans un pays, la mauvaise monnaie chasse la bonne.
D’après cette loi, « lorsque dans un pays circulent deux monnaies dont l’une est considérée par le public comme bonne et l’autre comme mauvaise, la mauvaise monnaie chasse la bonne ».
Dans un système monétaire bimétallique, lorsque des monnaies en or et en argent se trouvent simultanément en circulation avec un taux de change légal fixe, les agents économiques préfèrent conserver, thésauriser la « bonne » monnaie. Par contre, ils utilisent la « mauvaise » pour payer leurs échanges dans le but de s’en défaire au plus vite. Cela engendre des comportements qui vont menacer l’équilibre économique tout entier.
Bimetallism, between fixed and free prices
In a system based on bimetallism, gold and silver in coin form have a value linked to a fixed legal tender. However, precious metals are also freely traded when in raw material or bullion form. In these forms, gold and silver prices vary according to the market, and therefore depend on supply and demand (rise or fall in extraction of a metal, discovery of a deposit, etc.).
As a result, there can be a significant difference between the value of the coin and that of the raw material. The possibilities offered by bimetallism are immediately exploited by speculators for their personal enrichment. This will jeopardize the entire monetary equilibrium.
Let's take the example of an official fixed legal tender: twelve units (by weight) of silver are worth 1 unit of gold, whereas the price on the open market is 10 to 1 (i.e. gold is worth less than officially). In this case, we can highlight several mechanisms that jeopardize the system based on bimetallism.
Difference between legal rate and market rate
Buy the silver with gold at the legal rate (with five units of gold they'll get sixty units of silver), and resell it on the market (where sixty units of silver are worth six units of gold, resulting in a gain of 1 unit of gold). The central bank's silver reserves are depleted. To replenish them, it buys silver on the market (at a higher price than the legal rate) and pays the difference.
Speculation
It is also possible to speculate on a revaluation of silver. The principle is to take the gold to the central bank to obtain silver instead (at a rate of 5 to 60), wait for the government to set a par value in line with the actual relative abundance (10 to 1, for example), and recover more gold than at the start (at the new par value, the 60 units of silver will be worth 6 units of gold: the same gain as in the previous operation).
Hoarding
This encourages them to make their purchases in gold, and above all not with money to save it. In fact, it will be preferable to hoard or sell on the metal market. Silver will therefore disappear from monetary circulation, to be sold on the metal market or hoarded.
Fraud
The fraud mechanism was simple. When the price of silver metal fell, gold coins were used to buy silver metal. The latter was used to manufacture counterfeit coins with a face value, thus increasing their value. These coins were put into circulation, exchanged for genuine bills or coins and converted into gold at the official rate. This gold was again used to buy silver metal to reproduce the mechanism. With such high margins, counterfeits could be produced by weight and denomination.
The instability caused by the limitations of bimetallism gradually led to its abandonment. This led to monometallism, the use of a single monetary standard, gold.
